Posts Tagged ‘assets’

International readers of this blog – and those in the US who practice internationally – are more than likely aware of the doctrine of “comity” embraced by US commercial law.¬† In a nutshell, “comity” is shorthand for the idea that US courts typically afford respect and recogntion (i.e., enforcement) within the US to the judgment or decision of a non-US court – so long as that decision comports with those notions of “fundamental fairness” that are common to American jurisprudence.

In the bankruptcy context, “comity” forms the backbone for significant portions of the US Bankruptcy Code’s Chapter 15.¬† Chapter 15 – enacted in 2005 – provides a mechanisim by which the administrators of non-US bankruptcy proceedings can obtain recogntion of those proceedings, and further protection and assistance for them, inside the US.

But in at least some US bankruptcy courts, “comity” for non-US insolvencies only goes so far.¬† Last month, US Bankruptcy Judge Thomas Argesti, of Pennsylvania’s Western District, offered his understanding of¬†where “comity” stops – and where US bankruptcy proceedings begin.

Judge Argesti currently presides over¬†Chapter 15 proceedings commenced in furtherance of two companies – Canada’s Railpower Technologies Corp. (“Railpower Canada”) and its wholly-owned US subsidiary, Railpower US.¬† The two Railpower entities commenced proceedings under the Canadian Companies Creditors’ Arrangement Act (“CCAA”) in Quebec in February 2009.¬† Soon afterward, their court-appointed monitors, Ernst & Young, Inc., sought recogntition of the Canadian Railpower cases in the US.

Railpower US’ assets and¬†employees – and¬†90% of its creditors – were¬†located in the US.¬†¬†The company was managed from offices in Erie, PA.¬† Nevertheless, it carried on its books an inter-company obligation of $66.9 million, owed to its Canadian parent.¬† From the outset, Railpower US’ American¬†creditors asserted this “intercompany debt” was, in fact, a contribution to equity which should be subordinate to their trade claims.¬† Judge Argesti’s predecessor, now-retired Judge Warren Bentz, therefore conditioned recognition of Railpower US’ case upon his ability to review and approve any proposed distribution of Railpower US’ assets.¬† After the company’s assets were sold, Judge Bentz further required segregation of the sale proceeds pending his authorization as to their distribution.¬† Finally,¬†after the Canadian monitors obtained a “Claims Process Order” for the resolution of claims in the CCAA proceedings and sought that order’s enforcement in the US, Judge Bentz further “carved out” jurisdiction for himself to adjudicate the inter-company claim if the trade creditors received anything less than a 100% distribution under the CCAA plan.

Railpower US’ assets were sold – along with the assets of its Canadian parent – to R.J. Corman Group, LLC.¬† Railpower US was left with US$2 million in sale proceeds against US$9.3 million in claims (other than the inter-company debt).¬† The Canadian monitor indicated¬†its intention to file a “Notice of Disallowance” of the inter-company debt in the Canadian proceedings, but apparently never did.¬† Meanwhile, approximately CN$700,000 was somehow “upstreamed” from Railpower US to Railpower Canada.¬† Finally, despite the¬†monitor’s¬†assurances to the contrary, Railpower Canada’s largest shareholder – and an alleged secured creditor – sought relief in Quebec to throw both¬†Railpower entities into liquidation proceedings under¬†Canada’s Bankruptcy and Insolvency Act.

Enough was enough for Railpower US’ American creditors.¬† In August 2009, they filed an involuntary Chapter 7 proceeding against Railpower US, seeking to regain control over the case – and Railpower US’ assets – under the auspices of an American panel trustee.

The Canadian monitor requested abstention under Section 305 of the Bankruptcy Code.¬† Significantly re-drafted in the wake of Chapter 15’s enactment, that section permits a US bankruptcy court to dismiss a bankruptcy case, or to suspend bankruptcy proceedings, if doing so (1) would better serve the interests of the creditors and the debtor; or (2) would best serve the purposes of a recognized Chapter 15 case.

Judge Argesti’s 14-page decision, in which he denied the monitors’ motion and permitted the Chapter 7 case to proceed,¬†is one of apparent first impression on this section where it regards a Chapter 15 case.

Where the “better interests of the creditors and the debtor” are concerned, Judge Argesti’s discussion essentially boils down to the proposition that because creditors representing 85% – by number and by dollar amount – of Railpower US’ case sought¬†Chapter 7, those creditors have spoken for themselves as to what constitutes their “best interests” (“The Court starts with a presumption that these creditors have made a studied decision that their interests are best served by pursuing the involuntary Chapter 7 case rather than simply acquiescing in what happens in the Canadian [p]roceeding.”).

The more interesting aspect of the decision concerns Judge Argesti’s discussion of whether or not the requested dismissal “best serve[d] the purposes” of Railpower’s Chapter 15 cases.¬† For guidance on this issue, Judge Argesti turned to Chapter 15’s statement of policy, set forth in Section 1501 (“Purpose and Scope of Application”) – which states Chapter 15’s purpose of furthering principles of comity and protecting the interests of all creditors.¬† Then, proceeding point by point through each of the 5 enunciated principles behind the statute, he arrived at the conclusion that the purposes of Chapter 15 were not “best served” by dismissing the involuntary Chapter 7 case.¬† As a result, Railpower US’ Chapter 7 case would be permitted to proceed.

Judge Argesti’s analysis appears¬†to focus primarily on (i) the Canadian monitors’ apparent delay in seeking disallowance of the inter-company debt in Canada; (ii) the “upstreaming” of CN$700,000 to Railpower Canada; and (iii) the monitors’ apparent failure, as of the commencement of the involuntary Chapter 7, to “unwind” these transfers or to recover them from Railpower Canada for the benefit of Railpower US’ creditors.¬† It also rests on the fact that Railpower US was – for all purposes – a US debtor, with its assets and creditors located primarily in the US.

In this context, and in response to the monitors’ protestations that comity entitled them to judicial deference regarding the Chapter 15 proceedings, Judge Argesti noted that:

comity is not just a one-way street.¬† Just as this Court will defer to a [non-US] court if the circumstances require it, so too should a foreign court defer to this Court when appropriate.¬† In this case it was clear from the start that [this Court] expressed reservations about the distribution of Railpower US assets in the Canadian [p]roceeding . . . .¬† The Monitor has [not] explained how this¬†[reservation] is to be [addressed] unless the Canadian Court shows comity to this Court.

Judge Argesti’s decision may be limited to its comparatively unique facts.¬† However, it should also serve as a cautionary tale for representatives seeking to rely on principles of comity when administering business assets in the US.¬† In addition to his more limited construction of “comity,” Judge Argesti also noted that recognition of Railpower US’ Chapter 15 case was itself subject to second-guessing where subsequently developed evidence suggested that the company’s “Center of Main Interests” was not in Canada, but in the US.

For anyone weighing strategy attendant to the American recognition of a non-US insolvency proceeding, this decision is important reading.

The market collapse of 2008 and resulting financial crisis have led to significant reflection on a number of systemic features of our financial markets and on the stability of institutions that play significant roles in their function.

The issue, at least as¬†put by Professor Morrison in the opening paragraphs of his paper, is framed as follows:

The President and members of Congress are considering proposals that would give the government broad authority to rescue financial institutions whose failure would threaten market stability. These systemically important institutions include bank and insurance holding companies, investment banks, and other “large, highly leveraged, and interconnected” entities that are not currently subject to federal resolution authority.¬† Interest in these proposals stems from the credit crisis, particularly the bankruptcy of Lehman Brothers.

That bankruptcy, according to some observers, caused massive destabilization in credit markets for two reasons.¬† First, market participants were surprised that the government would permit a massive market player to undergo a costly Chapter 11 proceeding. Very different policy had been applied to other systemically important institutions such as Bear Stearns, Fannie Mae, and Freddie Mac.¬† Second, the bankruptcy filing triggered fire sales of Lehman assets. Fire sales were harmful to other, non-distressed institutions that held similar assets, which suddenly plummeted in value. They were also harmful to any institution holding Lehman’s commercial paper, which functioned as a store of value for entities such as the Primary Reserve Fund. Fire sales destroyed Lehman’s ability to honor these claims.

Lehman’s experience and the various bailouts of AIG, Bear Stearns, and other distressed institutions have produced two kinds of policy proposals. One calls for wholesale reform, including creation of a systemic risk regulator with authority to seize and stabilize systemically important institutions.¬† Another is more modest and calls for targeted amendments to the Bankruptcy Code and greater government monitoring of market risks.¬† This approach would retain bankruptcy as the principal mechanism for resolving distress at non-bank institutions, systemically important or not.

Put differently, current debates hinge on one question: Is the Bankruptcy Code an adequate mechanism for resolving the distress of systemically important institutions? One view says “no,” and advances wholesale reform. Another view says “yes, with some adjustments.”

Morrison’s paper sets out to assess this debate, and concludes by advocating [again, in his words]¬†“an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks – monitoring and intervention – are closely tied, ensuring that intervention occurs only when there is a well-established need for it.” As a result of the close relationship between the power to intervene and the duty to monitor, however, any proposed legislation “is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations.”

Bankruptcy reorganization is, for the most part, an American success story. It taps into a huge body of law, provides certainty, and has shown an ability to respond to changing circumstances. It follows (for the most part) nonbankruptcy priority rules – the absolute priority rule – with useful predictability, sorts out financial failure (too much debt but a viable business) from underlying failure, and shifts ownership to a new group of residual claimants, through the certainty that can be provided by decades of rules and case law.

Notwithstanding its success, bankruptcy reorganization has a patchwork of exceptions, some perhaps more sensible than others.¬† Among them are depository banks (handled by the FDIC), insurance companies (handled by state insurance regulators), and stockbrokers and commodity brokers (relegated to Chapter 7 and to federal regulatory agencies).¬† In recent months, there has been a growing chorus to remove bankruptcy law, and specifically its reorganization process, from “systemically important financial in-stitutions (SIFIs),” with a proposed regulatory process substituted instead, run by a designated federal agency, such as the Federal Reserve Board or the Securities and Exchange Commission.

Putting aside political considerations, behind this idea lie several perceived objections to the use of the bankruptcy process.¬† First, it is argued, bankruptcy, because it is focused on the parties before the court, is not able to deal with the impacts of a bankruptcy on other institutions – an issue thought to be of dominant importance with respect to SIFIs, where the concern is that the fall of one will bring down others or lead to enormous problems in the nation’s financial system.¬† Second, bankruptcy – indeed, any judicial process – is thought to be too slow to deal effectively with failures that require virtually instant attention so as to minimize their consequences.¬† Third – and probably related to the first and second objections – even the best-intentioned bankruptcy process is assumed to lack sufficient expertise to deal with the complexities of a SIFI and its intersection with the broader financial market.

Jackson’s response to this growing chorus of objections is to propose amending existing Chapter 11 legislation.¬† Again, in his words:

The premise of [Jackson’s] “Chapter 11F” proposal, which [he] flesh[es] out [in his paper], is that, assuming the validity of each of these objections, they, neither individually nor collectively, make a case for creating yet another (and very large) exception to the nation’s bankruptcy laws and setting up a regulatory system, run by a designated federal agency, that operates outside of the predictability-enhancing constraints of a judicial process. Rather, bankruptcy’s process can be modified for SIFIs – [Jackson’s] Chapter 11F – to introduce, and protect, systemic concerns, to provide expertise, and to provide speed where it might, in fact, be essential. Along the way, there is probably a parallel need to modify certain other existing bankruptcy exclusions, such as for insurance companies, commodity brokers, stockbrokers, and even depository banks, so that complex, multi-faceted financial institutions can be fully resolved within bankruptcy.

One clear lesson of the 2008 recession, which brought Goliaths such as Bear Sterns, CitiGroup, AIG, and Washington Mutual to their knees, is that no financial institution, regardless of its size, complexity, or diversification, is invincible. Congress, as a result, is left with the question of how best to handle the failure of systemically significant financial companies (SSFCs). In the United States, the insolvencies of depository institutions (i.e., banks and thrifts with deposits insured by the Federal Deposit Insurance Corporation (FDIC)) are not handled according to the procedures of the U.S. Bankruptcy Code. Instead, they and their subsidiaries are subject to a separate regime prescribed in federal law, called a conservatorship or receivership. Under this regime, the conservator or receiver, which generally is the FDIC, is provided substantial authority to deal with virtually every aspect of the insolvency. However, the failure of most other financial institutions within bank, thrift, and financial holding company umbrellas (including the holding companies themselves) generally are dealt with under the Bankruptcy Code.

In March of 2009, Treasury Secretary Timothy Geithner proposed legislation that would impose a conservatorship/receivership regime, much like that for depository institutions, on insolvent financial institutions that are deemed systemically significant. In order to make a policy assessment concerning the appropriateness of this proposal, it is important to understand both the similarities and differences between insured depositories and other financial institutions large enough or interconnected enough to pose systemic risk to the U.S. economy upon failure, as well as the differences between the U.S. Bankruptcy Code and the FDIC’s conservatorship/receivership authority.

[Carpenter’s] report first discusses the purposes behind the creation of a separate insolvency regime for depository institutions. The report then compares and contrasts the characteristics of depository institutions with SSFCs. Next, the report provides a brief analysis of some important differences between the FDIC’s conservatorship / receivership authority and that of the Bankruptcy Code. The specific differences discussed are: (1) overall objectives of each regime; (2) insolvency initiation authority and timing; (3) oversight structure and appeal; (4) management, shareholder, and creditor rights; (5) FDIC “superpowers,” including contract repudiation versus Bankruptcy’s automatic stay; and (6) speed of resolution. This report makes no value judgment as to whether an insolvency regime for SSFCs that is modeled after the FDIC’s conservatorship/receivership authority is more appropriate than using (or adapting) the Bankruptcy Code. Rather, it simply points out the similarities and differences between SSFCs and depository institutions, and compares the conservatorship/receivership insolvency regime with the Bankruptcy Code to help the reader develop his/her own opinion.

Evidentiary hearings are scheduled for later this month in the ongoing struggle for control over the financial assets of Stanford International Bank, Ltd. (SIB), the cornerstone of Allen Stanford’s financial-empire-turned-Ponzi-scheme.¬† A series of posts on this blog have covered liquidators Peter Wastell and Nigel Hamilton-Smith’s efforts to obtain recognition in the US for their Antiguan wind-up of SIB, and US receiver Ralph Janvey’s competing efforts¬†to do the same in Canadian and UK courts.

The Stanford case is of considerable significance in the US – and in the UK and Canada, where it has spawned at least two decisions and related appeals over the parties’ efforts to obtain cross-border recognition for their respective efforts to clean up the Stanford mess.

In Dallas, Texas, where an enforcement action commenced by the American Securities and Exchange Commission remains pending (and where Mr. Janvey has been appointed as a receiver for the purposes of marshalling Stanford assets for distribution to creditors), US District Court Judge David Godbey has taken prior pleadings from both sides under advisement and, in advance of¬†this month’s hearing,¬†has requested further briefing on three issues.¬† Mr. Janvey’s brief, submitted last week,¬†addresses each of these as follows:

The Current State of Fifth Circuit Law on What Constitutes an Entity’s “Principal Place of Business,” Including Whether Stanford International Bank’s (“SIB”) Activities Were Active, Passive or “Far Flung.”

The Liquidators have argued that, under applicable Fifth Circuit standards, SIB’s “principal place of business” was Antigua and¬†that its activities were actively managed from Antigua, and were not “far flung” so as to render SIB’s Antiguan location irrelevant.

Based on this construction of Fifth Circuit law – and because COMI is generally equated to an entity’s “principal place of business” under US corporate law – ¬†¬†Janvey then argues that consistency and logic require the same rules be followed for COMI purposes.¬† He then goes on to argue that Stanford’s Ponzi scheme activities were ‚Äúfar flung,‚ÄĚ that SIB‚Äôs Antiguan operations were ‚Äúpassive,‚ÄĚ and that its ‚Äúnerve center‚ÄĚ and ‚Äúplace of activity‚ÄĚ were both in the U.S.

The Relationship Between SIB and the Financial Advisors Who Marketed SIB’s CDs to Potential Investors.

Wastell and Hamilton-Smith have argued that financial advisors who sold SIB’s CDs to potential investors were, in fact, independent agents employed by other, independent¬†Stanford broker-dealer entities and were not controlled by SIB.

Mr. Janvey pours scorn on this argument.¬† According to him, it does not matter that there were inter-company ‚Äúcontracts‚ÄĚ purporting to make the Stanford broker-dealer entities agents for SIB in the sale of CDs.¬† As Mr. Janvey views it, a fraud is a fraud . . .¬†from beginning to end.¬† Consequently, there was no substance to the “contracts” as all the entities involved were instruments of Stanford‚Äôs fraud.

The “Single Business Enterprise” Concept as Part of the “Alter Ego” Theory of Imposing Liability.

As noted above, Mr. Janvey takes the position that “alter ego” treatment of the Stanford entities is not only viable – it is the only appropriate means of treating SIB’s relationship to other, US-based Stanford entities, and of determining COMI for SIB.¬† He argues further that substantive consolidation – the bankruptcy remedy referred to by Messr’s. Wastell and Hamilton-Smith – can be just as effectively accomplished through a federal receivership, which affords US District Courts significant latitude in fashioning equitable remedies and determining distributions to various classes of creditors.

Mr. Janvey’s argument appears quite straightforward.¬† Because a fraud is a fraud, geography matters very little in determining its “center of main interests.”¬† According to him, what should count instead is the location of the fraudsters and the place from which the fraud was managed and directed.¬† Yet even Mr. Janvey acknowledges that “Antigua played a role in [Stanford’s Ponzi] scheme . . . [in that] [Antigua] was where Stanford could buy off key officials in order to conduct his sham business without regulatory interference.”¬† In other words, geography was important . . . at least for Stanford.¬† Specifically, geography provided Stanford direct access to a corrupt regulator who would afford cover for the conduct of Stanford’s fraudulent CD sales to investors.

“Chapter 15 contains a public policy exception: ‘Nothing in the chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.’ 11 U.S.C. ¬ß 1506. The facts warrant application of the public policy exception here. The very agency that first appointed the Antiguan [l]iquidators and then obtained their confirmation from the Antiguan court was complicit in Stanford’s fraud. That same agency has allowed financial fraud to flourish on Antigua for decades. It would be contrary to public policy for this Court to cede to Antigua the winding up of a company that bilked Americans and others out of billions when it was Antigua that permitted the fraud.”

Mr. Janvey then goes further still, arguing that Messr’s. Wastell and Hamilton-Smith (and their employer, British-based Vantis plc) are precluded by Antiguan law from complying with the disclosure requirements Judge Godbey has imposed on the US receivership – and therefore simply unable to concurrently administer a “main case” in Antigua and cooperate with the Receiver (or with the District Court) in the US.

Finally, Mr. Janvey gets directly personal: He recites the opinion of the Canadian court that revoked Vantis’ administration of Stanford’s Canadian operations and refused recognition of the Antiguan wind-up on the grounds that “Vantis’ conduct, through [Messr’s. Wastell and Hamiton-Smith], disqualifies it from acting and precludes it from presenting the motion [for Canadian recognition], as [Vantis] cannot be trusted by the [Canadian] Court . . . .”¬† The Canadian court’s opinion has been upheld on appeal, and is now final.

In a nutshell, Mr. Janvey argues that geography shouldn’t matter where a fraud is concerned¬†. . . but if it does matter, it ought to count against jurisdictions such as Antigua, an “impoverished¬†island” which has a population “about 80% that of Waco, Texas” and a history of financial fraud.

As is sometimes said in Texas, “Them’s fightin’ words.”

The SEC’s brief, like Mr. Janvey’s,¬†is also on file.¬† Messr’s. Wastell and Hamilton-Smith’s reply will be due shortly.

Several weeks have passed since Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey briefed US District Judge David Godbey on the liquidators’ request for US recognition of their proposed Antiguan liquidation of Stanford International Bank, Ltd. (SIB).

Readers will recall that Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, a federal receiver appointed in Dallas’ U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford (links to prior posts can be found¬†here).¬† Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

One of the preliminary questions in these proceedings is which of them will receive deference from the others.¬† Of particular interest is which proceeding – and which court-appointed representative – will control the administration of SIB.¬† The¬†Eastern Caribbean Surpeme Court (Antigua and Barbuda)¬†has found, perhaps predictably,¬†that SIB’s liquidation is to be adminsitered in Antigua.¬† It also has found that Mr. Janvey has no standing to appear as a “foreign representative” or otherwise on behalf of SIB or other Stanford entities.

In London, the English High Court of Justice, Chancery Division’s Mr. Justice Lewison reached a similar conclusion in early July.¬† Based on a determination under English law that SIB’s “Center of Main Interests” (COMI) is in Antigua, he designated Messr’s. Wastell and¬†Hamilton-Smith as “foreign representatives” of SIB for purposes of Stanford’s English insolvency proceedings.

In Dallas, meanwhile, Judge Godbey has permitted the Antiguan liquidators¬†to commence a Chapter 15 proceeding under the US Bankruptcy Code and to make application for similar recognition of SIB’s Antiguan liquidation in the US.¬† Messr’s. Wastell and Hamilton-Smith and Mr. Janvey have each briefed the question of whether, under US cross-border insolvency law, that liquidation ought to be recognized here as a “foreign main proceeding” – and, more specifically, whether Antigua or the US is the properly designated¬†COMI for SIB.

In briefs submitted over six weeks ago, the liquidators urged a finding consistent with that of the English and Antiguan courts.¬† They argued essentially that a debtor’s “principal place of business” is essentially the location of its “business operations,” and referred repeatedly to SIB’s undeniably extensive physical and administrative operations in Antigua.

In opposition, Mr. Janvey argued strenuously for a finding that SIB’s COMI is, in fact,¬†the US.¬† He did so relying largely on the contention that, despite SIB’s physical location and operations in Antigua, Sir Allen allegedly “spent little time in Antigua” – and that Sir Allen¬†effectively managed and controlled SIB from the US.¬†¬†Mr. Little, the examiner appointed by Judge Godbey to assist him in overseeing the receivership, generally concurred with Mr. Janvey.

Last week, Mr. Janvey’s contention may have received a set-back.

The United States Fifth Circuit Court of Appeals recently upheld a detention order confining Sir Allen to¬†the US pursuant to a separate federal indictment issued against him – and in so doing, concurred in the lower court’s conclusion that Sir Allen’s ties to the State of Texas were “tenuous at best.”¬† The Fifth Circuit’s 3-judge panel¬†recognized that Stanford “is both an American citizen and a citizen of Antigua and Barbuda, and has resided in that island nation for some fifteen years,” and further noted:

Stanford admitted that he established a new residence in Houston in preparation for his required presence during the pendency of the case against him.¬† Several of his children have recently moved to Houston to be closer to him during the proceedings.¬† While Stanford did grow up in Texas, he has spent the past fifiteen years abroad.¬† His international travels have been so extensive that, in recent years, he has spent little or no time in the United States . . . .¬† [O]ne of Stanford’s former pilots [testified] that Stanford . . . engaged in almost non-stop travel on the fleet of six private jets and one helicopter belonging to [Stanford Financial Group] and its affiliates . . . .

On September 1, Messr’s. Wastell and Hamilton-Smith sought leave to file the Fifth Circuit’s order in support of their prior application for recognition, and over Mr. Janvey’s anticipated objection.

It appears that where Sir Allen’s indictment is concerned, home is where the corporate jet is.

A flurry of pleadings this week precede Judge David Godbey’s anticipated ruling on Peter Wastell’s and Nigel Hamilton-Smith’s request for recognition of their liquidation of Stanford International Bank, Ltd. (SIB), now pending in Antigua.

As readers of this blog are aware, Messr’s. Wastell and Hamilton-Smith have been at odds with Ralph Janvey, a federal receiver appointed in U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford.¬† Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

The Antiguan liquidators previously obtained permission from Judge Godbey – over Mr. Janvey’s opposition – to commence a Chapter 15 case in Dallas.¬† The liquidators then¬†sought recognition for their Antiguan liquidiation pursuant to the provisions of Chapter 15 – which Mr. Janvey has again opposed.¬† A recent post on this blog summarized the Antiguan liquidators’ reply to these objections.

This week, as scheduled, John Little – an examiner appointed by Judge Godbey to assist the Court in overseeing the receivership – filed papers summarizing his position on the liquidators’ request.

Before he did so, however, yet another court – this one in England – weighed in on the Stanford matters.¬† In a decision rendered on the eve of America’s July 4 holiday, the English Hight Court of Justice, Chancery Division (London)’s Justice Lewison found that Antigua – and not the US – should be SIB’s “Center of Main Interests” (COMI) under the UK’s 2006 Cross-Border Insolvency Regulations (the general equivalent of the US’s Chapter 15).

The crux of Mr. Justice Lewison’s 29-page decision, at least as it regards SIB’s COMI, rests both on the burden of proof to demonstrate COMI and on the nature of the evidence required to carry that burden.

The English decision holds, first,¬†that once certain prima facie¬†evidence is¬†introduced to¬†establish COMI in a particular jurisdiction, the presumption of COMI in that jurisdiction arises in favor of the foreign representative and it is the burden of a contesting party to defeat the presumption.¬† Second, the¬†decision holds that the¬†only evidence that counts in rebutting the decision is that which would be objectively ascertainable to third parties – specifically, creditors.

Mr. Little, the examiner whose 19-page brief was filed last Wednesday, respectfully disagrees with Mr. Justice Lewison.¬† The essence of Mr. Little’s analysis is that it is the location of the management of an enterprise that determines its COMI.¬† According to Mr. Little:

Banks are not just groups of tellers and form checkers, but institutions that gather money, pool it and invest it in the hopes of keeping the funds secure and making a profit.¬† Banks are more than the street corner branch offices or drive-through windows at which people make deposits, cash checks, pay bills and verify balances.¬† The weightiest activities of a “bank” are the activities involved in what a bank does with the money it gathers and manages.¬† To determine the locale of SIB’s COMI, the Court must determine where that activity was primarily carried out.¬† (Emphasis supplied).

Mr.¬†Little also argues that the English Court’s decision ought not to guide Judge Godbey’s determination of COMI.

In particular, he argues that Mr. Justice Lewison’s assignment of the burden of proof regarding COMI – to the Receiver who, under English law, must overcome a presumption of COMI in the foreign representative’s favor – is at odds with American case law.¬† American law, explains Mr. Little,¬†renders the COMI presumption of little weight and further assigns the burden of proof to the foreign representative seeking recogntion of a “main case” – and not to the foreign representative’s opponent.¬† Mr. Little argues that the “objective” evidence “ascertainable by a third party” is far different than that which an American court would consider, as borne out by relevant US decisions.¬† He suggests that a ruling made on such factors may, in fact,¬†provide a “roadmap” of sorts to parties who plan to defraud the public by permitting them to construct an “objectively ascertainable” – but sham – business in a jurisdiction of their choosing.

Finally,¬†Mr. Little acknowledges that the “public policy exception” to Chapter 15 – set forth at Section 1506 of the Code – is a very narrow one, but offers the observation that to the extent it may apply in this case, the SEC’s position in the matter should be construed as US policy.

Though Judge Godbey has yet to provide leave to file them, Mr. Janvey’s papers echo much of the same observations made by Mr. Little.¬† They also add some of Mr. Janvey’s own, additional arguments – one of which is that Mr. Justice Lewison’s reliance on an “objectively ascertainable” standard is a unique creature of the EU Insolvency Regulation, and finds no basis either in the UK Regulations (which should have controlled Mr. Justice Lewison’s decision) or in US law.¬† In particular, Mr. Janvey argues that the Eurofoods decision – a seminal decision on COMI rendered by the European Court of Justice, and which¬†formed the primary basis for Mr. Justice Lewison’s decision¬†– imposes an unnecessary restriction on the evidence which ought to be reviewed by an American court (or, for that matter, by an English court) for this purpose.

In fact,¬†Section 1508 itself provides that in interpreting phrases such as “center of main interests,” “the court shall consider” how those phrases have been construed in other jurisdictions which have adopted similar statutes.¬† As a result, considerable ink¬†already has been spilled in the US over the EU Regulation, Eurofoods,¬†and foreign decisions generally and their interpretive effect on determing COMI in a US Chapter 15 case.¬†¬† In a recent and¬†extensive discussion of the interpretatation of “COMI”¬†as it¬†appears in Chapter 15, Judge Bruce Markell discusses both the EU Regulation and Eurofoods, and¬†observes that

a commonality of [US] cases analyzing debtors’ COMI demonstrates that courts do not apply any rigid formula or consistently find one factor dispositive; instead, courts analyze a variety of factors to discern, objectively, where a particular debtor has its principal place of business. This inquiry examines the debtor’s administration, management, and operations along with whether reasonable and ordinary third parties can discern or perceive where the debtor is conducting these various functions.

This blog has intermittently followed the Texas-sized contest for control over now-defunct financial and investment entities once operated by Sir Allen Stanford.¬† That contest has pitted Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith against federal receiver Ralph Janvey.¬† Prior posts are located here, here, and here.

Approximately one month ago, US District Judge David Godbey permitted Messr’s. Wastell and Hamilton-Smith to commence a Chapter 15 case on behalf of Stanford International Bank (SIB), headquartered in Antigua.¬†¬†A hearing regarding the liquidators’ request for¬†US recognition of SIB’s liquidation is tentatively calendared for mid-July.¬† The parties have submitted a joint status report and have also filed further briefing on the question of the Stanford entities’ “Center of Main Interests” (COMI) –¬†which the parties believe will¬†determine the location of¬†a “main proceeding” for the¬†Stanford entities, and will further determine what (if any)¬†recognition US courts will give that proceeding.

Briefing and evidence submitted to date provides a preview of the parties’ positions, as well as on the issues that the Judge Janvey will need to address:

– COMI.¬† A supplemental¬†affidavit submitted by Mr. Hamilton-Smith in support of recognition appears to stress both (i) SIB’s corporate separation from other Stanford entities; and (ii) its function as the effective “nerve center” of global Stanford investment operations.¬† In¬†a 50-page response to the Liquidators’ petition for recognition, Mr. Janvey argues that (i) the Stanford entities’ principal interests, assets, and management are not in Antigua; (ii) SIB was a mere “shell” for a fraudulent scheme¬†headquarted in, and implemented from, the US; and (iii) COMI is the location from which the fraud emanates, and not from the location where investors have been duped into believing a legitimate business was run.¬† And lest we forget matters of policy,¬†the Receiver offers the somewhat conclusory arguments that because a receivership (rather than a bank liquidation) is the appropriate means of investigating a fraud, because the Antiguan government is somehow too close to this liquidation, and because the liquidators have allegedly attempted to “end run” the Receivership by obtaining a recognition order in Canada (an allegation bitterly contested by the Antiguan Liquidators), recognition of a Chapter 15 would be against public policy.¬† A concurrent response filed by the SEC largely concurs in these arguments.¬† The SEC appears to rely heavily on the US citizenship of Mr. Stanford and most members of his board of directors (in fact, “Sir Allen” holds joint US-Antiguan citizenship), the purported location of management¬†decisions (according to the SEC, within the US), and the comparative dollar volume of¬†SIB investment sales in the US¬†as the primary basis for opposing the request to recognize SIB’s Antiguan liquidation as the “main proceeding.”

– Substantive Consolidation?¬† The parties’ briefs to date raise the issue of substantive consolidation (or “aggregation”).¬† The Liquidators advise Judge Godbey that they expect the Receiver to argue in support of substantive consolidation of the Stanford entities.¬† Mr. Janvey never directly addresses his position on substantive consolidation, calling it a “bankruptcy question” which is appropriate only in the event that multiple Stanford entities find themselves in bankruptcy in the US (a possibility triggered by filings briefly mentioned below).¬† However, Janvey goes on to reiterate his position that the Stanford entities must be treated as part of a single, integrated receivership, since the Stanford entities operated as a single “integrated network.”

– Involuntary Proceedings?¬† The parties’ joint status report mentions a request by certain investors for permission to file involuntary bankruptcies in the US against one or more of the Stanford entities.¬† That request has been opposed by the Receiver, who argues that rather than bankruptcy, a federal receivership (i) is really the best way to adminsiter an alleged Ponzi scheme; (ii)¬†protects creditors’ and investors’ due process (and bankruptcy doesn’t?!);¬†and¬†(iii) provides the maximum degree of flexibility, essential to the equitable relief and redress this case requires.¬† The Examiner disagrees with the Receiver, suggesting that Judge Godbey can – and, indeed,¬†should – evaluate the relative merits of a bankruptcy (rather than a receivership) for the Stanford entities, but cautions that the investors must demonstrate the relative benefits of such a proceeding vis √° vis a receivership.

– Cooperation?¬† In a now-familiar refrain, the Receiver and the Antiguan Liquidators blame each other for failing to cooperate, all the while holding out their own respective proposed cooperation schemes.¬† Mr. Hamilton-Smith’s affidavit (mentioned above) proposes a general framework of cooperation in the event that a request for recognition of SIB’s liquidation is approved.¬† The same investors seeking permission to commence an involuntary proceeding (also mentioned above) argue that, in fact, Chapter 15 provides the best¬†vehicle for¬†cross-border coordination no matter where the “center of main interests” is ultimately determined.